Mark Koscinski Uncategorized

Decision Making: Essentials You Always Wanted to Know

I am proud to say my book on Decision Making is now available from Vibrant Publishers. The website is http://www.vibrantpublishers.com. The book is part of their Self-Help Series but can also be used in undergraduate classes on decision analysis. I have actually field tested the contents in both an undergraduate and graduate class, and it was well received.

I have previously contributed an article on Commercial Lending to their Financial Management book, also part of the Self-Help Series. I look forward to working with them in the future!

Mark Koscinski Uncategorized

Vatican Financial Scandal Provides Lessons for NFP Managers—Sadly…

The Vatican recently announced Giovanni Angelo Cardinal  Becciu has resigned as prefect of the Congregation for the Causes of Saints (the Vatican department overseeing investigations into the lives of potential saints) and his rights as a cardinal.  What the latter means is unclear at this moment, but presumably tCardinal Becciu will not be able to participate in any conclave for the election of a new pope. If so, he becomes the third cardinal stripped of such rights under Pope Francis. This his is a rare public rebuke, especially since Cardinal Becciu is 72 years old and could have participated in papal conclaves until the age of 80.  To be fair, the Cardinal has maintained his innocence, claiming he should be judged by the norms in place at the time, and not retroactively.  Sadly, he has overlooked the fact legal action always has the benefit of hindsight. 

This blog has previously reported on the use of Peter’s Pence funds (the world wide collection taken up for the Vatican) for the purchase of a warehouse property in London that would eventually be converted into luxury apartments. The purchase price was purportedly somewhere in the vicinity of $225 million, but that also remains unclear at this point.  Cardinal Becciu’s name has been prominently connected with this transaction while he served as sostituto, the deputy to the Vatican Secretary of State (papal prime minister) and functioned as the Pope’s chief of staff.  There are also claims of nepotism in the form of payments to relatives. 

What can an NFP manager learn from this debacle? Not only was the use of the funds apparently not authorized  by Pope Francis, the books and records of the transaction were also tampered with.  The loan for the financing of the property was netted against the asset on the balance sheet of the Vatican. As any student of accounting will tell you, this is a major no-no in accounting.  Transactions must be shown “broad” with no netting so important details such as the true amounts or even the existence of the debt in this case could not be concealed. Netting the loan value against the asset value is simply an outright attempt to conceal liability. Even more importantly, this serves as a reminder for the management of any not-for-profit organization the accounting for transactions must be separated from the personnel initiating and conducting the transaction.  If this is not possible because of limited personnel,  there must be a robust review of the accounting records to make sure “entrepreneurial” accounting of this type will be detected. 

To Pope Francis’ credit, he had prohibited netting in accounting some time ago, instituted new controls on contract approvals and has punished the apparent wrong-doer.  This is all good. However, what about the more general question of the control environment?  How did the Vatican Secretary of State (the Pope’s prime minister) not know his deputy Becciu was involved in some very shady dealings? The Church is a hierarchical structure.  It would seem there should have been some effective detective controls in place.  Apparently, there were not.  Also, segregation of duties  seem to have been very poor since one would not think a chief of state would be involved in such a major acquisition or access funds in the manner he did. 

Update: On July 2, 2021 Cardinal Becchiu was indicted for fraud, embezzlement, and a host of other crimes. The trial is scheduled to begin on July 27, 2021.

Mark Koscinski Uncategorized

Redundancy

Zoom crashed on the first day of classes. Apparently, the outage was not restricted to Moravian College, where I am a professor, but was a more global phenomena. This was not a particularly good start to the semester. It is even more embarrassing as students in many colleges are petitioning for tuition reductions precisely because many if not all classes at many colleges are being held on-line. Its failure caused a brief panic at the school, as professors scrambled for alternatives.  

The question is why was there such anxiety.  Zoom has become a mission critical platform not only for colleges and universities but also for many other organizations  during this pandemic. Procedures should have been in place to provide for this contingency. The United States military has a saying, “if you have one you have none.” A very pithy saying to be sure, but it does carry a nugget of truth. Any mission critical process, platform etc. must have a backup.  I am sure many of us have been frustrated when we have tried to make a purchase at a retail outlet only to find it couldn’t be done since “the computers are down.”  Think of the potential sales lost in such  situations, as well as the customer dissatisfaction generated. 

The word redundancy has taken on some bad connotations in modern American life, but it is necessary in the operation of any organization.  What are some of the characteristics of  a redundant system?  First, people have to know about it and be trained in its use.  The College offered two or three alternatives to Zoom during the crisis in an attempt to be helpful. In my opinion this was an okay but not an optimal response. The technology group needs to be ready to support one platform in a crisis, and not multiple platforms. Also, using multiple platforms only sows the seeds of confusion among the users.  Instead of spending time figuring out which platform to use, the instructor and the students could have spent the time more profitably brushing up on the operation of the uniquely designated second platform. After all, if Zoom crashed once, why can’t it happen again? The next time professors and students will be acquainted with the backup platform, and the transition to its use will be even smoother. 

Secondly, the redundant system should be something users have at least a passing familiarity with.  This can be done through training or by using another already existing platform. In our case, the college uses Canvas as its learning management system. Professors and students are used to navigating through the system. Canvas has a completely functional video conferencing capability that can be  activated with two or three clicks. In short, it was the perfect backup platform. Simple, widely available and known to all the users, and easily operated. It was more than sufficient to deal with a short Zoom shortage. 

What is the lesson for NFP organizations?  Remember redundancy.  Remember simplicity in backup design is a key consideration as the first reactions to any crisis can be confusion or even a short burst of panic. Having a simple to use backup platform will save a lot of time and nervous energy. 

Mark Koscinski Uncategorized

Use Them or Lose Them!

We all know the airline industry has suffered horribly during this pandemic. Only a fraction of the airline fleet is being used, and I can’t even guess at what capacity. It should come as no surprise though many frequent flier points are lapsing. One way you can help your favorite Not-For-Profit organizations is to donate your expiring points to them. I am told this will update your usage record and roll the points forward. If this is correct, it is a win-win for both the NFP and you. Even so, donating points seems like a painless way to help struggling organizations serving the common good. Please consider this as another way to help!

Mark Koscinski Uncategorized

PPP Loan Forgiveness–Part II

The  Small Business Administration(SBA) has just published its PPP loan forgiveness process. Borrowers are required to submit a package to their lenders documenting use of the funds was done in accordance with the terms of the loans.  The lender will have 60 days to make a good faith determination this was so.  Any deficiencies in the application will need to be corrected before the package is submitted to the SBA. Assuming this is done properly, the SBA will then have 90 days to make a determination of forgiveness.  If rejected, there is an appeals process. The SBA has indicated it will review all loans in excess of $2 million for compliance and possibly for eligibility as well.  

In a previous blog I was critical of the Financial Accounting Standards Board requiring organizations to wait until the SBA formally grants forgiveness of the PPP loans before they could be removed from the borrowers’ balance sheet. Let’s look at this situation. There is a high probability the loan packages will be rejected by either the bank or the lender along the way. Corrections will be made, adding more time to the process. (You have all dealt with banks and regulators before, right?)  Optimistically, this could take a minimum of six months.   The borrower could have satisfied all of the requirements for forgiveness except not  hand-in complete paperwork. This simple action, subject to the whims of bankers and regulators, could determine the date the loan is forgiven and not the economic event of compliance. Since the SBA will not begin accepting applications until August 10, PPP liabilities will be on the balance sheet for six months minimum, clouding  readers’ analysis of the financial statements. Does this make sense to anyone?

Let’s look at some of the practical implications of this. I had complained  NFP organizations with a fiscal year-end of June 30 had no chance of having the debt removed from their balance sheet.  Now, NFP organizations with a fiscal year-end of September 30 will also be carrying the debt on their year-end balance sheets. This will probably be the case for December 31 year end organizations as well. 

In the meantime, bankers will need to give very clear instructions about what they will accept as proof of compliance to speed the process along.  Similarly, NFP management should not make the lenders or the SBA work hard to recommend or grant forgiveness.  Take the time to put together an easy to follow package with sufficient detail. Make the package easy to review.  In short, don’t scrimp on the upfront preparation.  It will only slow the process down.  You want this loan off your balance sheet as fast as you can. 

Mark Koscinski Uncategorized

Put Me In Coach!

Today is the start of the major league baseball season. Major League Baseball is big business and some of its aspects have already been discussed in these pages. Many issues were already overhanging baseball before the onslaught of COVID. The collective bargaining agreement needs to be renegotiated next year. Attendance has been declining. The fan base is aging. My beloved Mets are up for sale–again. (Don’t feel too bad for ownership though. Forbes estimates the team is worth $2.4 billion. It was purchased for less than $400 million, resulting in a slick 12% compounded rate of return for a mismanaged team if a sale goes through at the reported value.)

And then, there is COVID, the 800 pound gorilla in the baseball room. Besides the human tragedy the pandemic has caused, it has altered the very core of baseball itself. There are a slew of new odd rules (someone please explain the roster rules to me) and a shortened. Fans are argue about what a championship would mean this year, if anything. What happens if a team’s starting lineup tests positive for COVID? What happens if COVID is around next year too?

I simply don’t care about any of this except for the human pain caused by COVID of course. Baseball is a national treasure, and I can’t wait to watch a game. As a deprived fan, I have been reduced to watching the neighbors kids play wiffle ball (from a socially safe distance of course.). These youngsters played with a great deal of enthusiasm, and I loved it. They ribbed each other in a good natured way and made fun of their favorite teams. It was great.

I need more though. I need to see a major league slider and a two seam fastball. I need to see someone go from first to third on a base hit. I need to hear Keith Hernandez and Ron Darling call a Met’s game. The country and I need Major League Baseball! Not only will it bring joy to baseball fans, but it will help the economy as well. As long as the players are safe, I say Batter Up!

Mark Koscinski Uncategorized

Accounting for PPP Loan Forgiveness

The Financial Accounting Standards Board (FASB) decided  forgiveness of the Payroll Protection Program (PPP) loans should be accounted for as forgiveness of debt income when the Small Business Administration (SBA) formally absolves the NFP from repayment. This is consistent with previous FASB pronouncements but is somewhat puzzling in this context. The old maxxim consistency is the hobgoblin of small minds is apt. In more normal circumstances, the lender wants repayment when a loan is made  and the borrower normally intends to repay the loan.  This is not how PPP loans are structured.  The lender’s intent  from the very beginning was to forgive the loan if certain conditions were met. These conditions include  using  the borrowed funds to meet payroll and pay other agreed upon expenses. It seems the better matching of income and expense occurs when the NFP uses the funds to make payroll and satisfies the conditions of the program. The  probability of loan repayment becomes remote at that point, triggering the accounting recognition of income then and there. . The final paperwork absolving the debtor from repayment is only a ministerial action by the SBA under this theory, with no impact on the financial accounting.  

Many NFP entities have a June 30 fiscal year-end. Their  financial statements  will reflect a decrease in revenues due to the shutdown from the ongoing pandemic, their ongoing operating expenses  and a liability to the federal government.  In effect, this is a double-whammy.  The operating statement will reflect dismal results due to the loss of revenue and the balance sheet will show  deterioration due to the loan.  This is not where any NFP, depending on public support for its funds, wants to be.  The absurdity continues into the following fiscal year when its financial statements will  show a windfall from the loan forgiveness, distorting yet another year’s operating statement.  The only remedy NFPs will have is disclosing the probability of repayment  and pro-forma results of operations assuming repayment will not be made. This is not a satisfactory “work-around” as many readers do not take the time to read all of the footnotes.  Operating a NFP is tough enough.  Management doesn’t need to be weighed down with pedantically correct rules ignoring the substance of s transaction. 

Mark Koscinski Uncategorized

NFP Horseshoes–June 2020

Even though social distancing is still in effect in many Northeastern states, summer time has arrived.  As we approach the Summer Solstice, it is once again time to play  Not-For-Profit Horseshoes.  You remember the game.  A ringer counts for three points.  A double ringer is six.  Closest to the stake is one point, and a leaner is two. (The points for a learner is a local rule, not generally accepted!)

Here are some of the players and their scores in  recent  months:

Apple Computer–a  rare double ringer  for offering individualized lessons to college professors using the iPad and  Apple pencil. Professors such as myself have to spend a lot of time staying current with the subject material we teach let alone mastering new technology in the post-COVID world.  Apple has been making things a lot easier for everyone at colleges and universities, and our classes will be all the better for it.  The double ringer was awarded since Apple originally offered the free lessons through May, but has since extended the program through June.  This is a great example of corporate social responsibility. 

Rutgers University– My alma mater was nowhere near the stake in the  last issue of the alumni magazine. Rutgers was making a plea for donations since it expects its budget to be cut.  As I mentioned in previous blog entries, COVID-19 had hit not only NFP organizations but also state and local governments.  New Jersey funds about twenty percent of Rutgerts’ budget, and the university quite rightly expects there will be budget cuts.  In the same issue, Rutgers proudly talks about  rehiring Greg Schiano, a former head football coach both in the NFL and at Rutgers.  A quick internet search shows his salary is an eye popping  $4 million per year plus a king’s ransom for his  staff’s salary. I won’t go through the story of Schiano’s previous tenure as head football coach at Rutgers or the faculty’s reaction to his return, but it is  not a pretty one. As if this wasn’t enough, the magazine also  had a picture of a former president of Rutgers who is being paid a queen’s ransom for being a  professor after his troubled tenure as  president.  Such media sensitivity will undoubtedly increase alumni donations. Right. 

The Vatican–Have you heard the expression “close only counts in horseshoes and hand grenades?”  Unfortunately, the Vatican’s last pitch of the horseshoes isn’t even within the explosive radius of a hand grenade to the stake as it is dealing with the recent $225 million dollar plus London real estate scandal. This transaction was  initiated by the Office of the Papal Secretary of State, the Pope’s Prime Minister.  The sad part is the funds involved were purportedly generated by the annual Peter’s Pence collection, which the Vatican claims goes for humanitarian and mission work. It seems a couple of laymen will be tried in a Vatican court and that will be the end of that.  Of course, no senior Vatican officials were involved, right?  Hey, where is that final report on Cardinal McCarrick anyway?  You would think the need for financial transparency would have been learned long ago. It remains to be seen how the bad news that seems to be continually flowing from Rome will be taken by the faithful around the world. 

Mark Koscinski Uncategorized

We Are Only Here For a Short While.

I was saddened to hear of the passing of a fellow member of the board of directors of MOCEANS, Inc. in May 2020. Victoria Kaloss, a kind and gentle soul left this veil of tears after a very accomplished life. She was an  advocate for the disabled and volunteered with many NFP organizations including Riverview Medical Center, The ARC of Monmouth County, and the Monmouth-Ocean County Educational System.  Victoria was also a poet.   She made a difference in the lives of everyone she came in contact with.  A blessed repose and eternal memory!

At times like these, we should stop and think about our lives.  Do we make a difference to those WE come in contact with?  Can we do more to help others? Victoria left this world too early, reminding us we are only here for a short time at most. Make a difference.  Volunteer at an NFP and help where you can. 

Mark Koscinski Uncategorized

NFP Internal Controls and COVID-19

Internal Control Concerns in an NFP Due to COVID-19

The “new normal” of the post COVID-19 world poses significant risks to NFP organizations. Aside from the myriad of operational issues, internal control effectiveness may have deteriorated as well.  Much of the daily accounting work was done at home without segregation of duties. For instance, checks may have been printed  with one person controlling the check stock, writing the checks and signing the checks out of necessity.  When you compound the current sometimes limited level of internal control with the “new normal”, NFP management and boards will need to be more attentive  to fraud and mismanagement flags.  Even NFPs with an independent audit are not immune from potential issues.  Remember, independent auditors do not audit to find fraud.  Even the typical audit procedures may not be as effective as before since much if not all of an audit may be conducted remotely.

What should NFPs do in order to protect themselves?  Here are ten concrete steps Boards and Management should consider:

  1. Have a reporting system in place that detects and reports unusual payments. Payments above a certain threshold should be reported to a responsible offer for review. 
  2. Insist financial reporting be brought up to date as quickly as possible. Small accounting staffs wear  many hats and are often challenged getting out monthly financial reports already.  Depending on the workload, a slowdown in financial reporting in the current environment is to be expected. However, the relaxation of internal controls does increase the risk of fraud and management to an organization.  Timely financial statements provide a valuable detective control. The faster they are brought up to date the less the risk there is to the organization. 
  3. Make sure the quality of financial reporting does not deteriorate.  Variance explanations between actual results and budget need to be maintained at the same level as before, if not increased. 
  4. Make sure all payroll taxes are being paid. Personal liability attaches to responsible parties for delinquent payroll taxes and withholding. If you are an officer, you could be left “holding the bag”.  If  payroll taxes have been deferred under recently enacted guidelines, make sure there is sufficient liquidity to pay them when due.  Remember, employee withholding still needs to be remitted. 
  5. Make a list of and make sure any other statutory payments are being made.  For instance, your organization may owe the government money from a performance audit.  It is critical such payments are made  in compliance with contractual provisions.  Government contracts may be a big source of revenue for NFP organizations.  An action as simple as not paying a bill should not be allowed to jeopardize the future prospects of the organization. 
  6. Be alert for any unanticipated losses, increases in other expenses, or increases in other assets.  These are common ways  for fraudsters to hide illicit payments. 
  7. Have an audit committee even if there is no external auditor.  Just knowing someone is watching can deter some fraudsters. 
  8. Require separation of duties be restored as quickly as possible.  It may have been necessary to make exceptions during the COVID Crisis, but the “old normal” of segregation of duties should be brought back as soon as possible. 
  9. Review the controls around electronic banking.  Electronic banking has exploded during the crisis. Make sure adequate controls are installed around this process as soon as possible. 
  10. Remain vigilant! Good internal control and a healthy skepticism is always warranted when liquid assets are concerned. This is even more true in a crisis environment!